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How Can Farmers Live With Volatility?

23 December 2015

ANALYSIS - Price volatility is something that farmers are going to have to live with as it is going to be a feature of farming given the impacts of climate change and swings in production across the globe, writes Chris Harris.

However, according to Dr Paul Wilson, professor of agricultural economics at the University of Nottingham, giving evidence to the UK House of Lords’ EU Energy and Environment Sub-Committee, price volatility is not always a bad thing as during the upswing it is good for farmers, but it becomes a problem during a down swing.

Giving evidence to the Inquiry on 'Responding to Price Volatility: Creating a More Resilient Agricultural Sector', he said that farmers in the UK are going to experience volatility because they are operating in a global market.

“It is how they manage it,” he said.

Dr Wilson said that there is variable production on the farm because of the climate, and variable prices partly because of global prices, but also because of the elastic nature of food production meeting the needs of the consumer to eat.

He said that regional differences in how farms were affected by volatility were largely a matter of the type of farm, although there have also been differences in the way the Single Farm Payment from the Common Agricultural Policy was being introduced in Scotland and Wales compared to England.

Dr Wilson said that a large proportion of farm income still comes from the Common Agricultural Policy though the single payment, which he said was a cushion when it comes to price volatility and also provides an incentive for banks to provide support to farmers.

Ross Murray, president of the Country Land and Business Association said: “The principle hedge against volatility is the Pillar One payment.

“It is increasingly important.”

Mr Murray said that agriculture will have to adapt to meeting the demands of volatile prices and banks will have a major role to play in this area.

“There will be a high degree of consolidation,” he said. “But it is not the size of the farm, it is the profitability and the ability to manage itself.”

Mr Murray added that UK farmers could take a lesson from some parts of Northern Europe where farmers are working in cooperatives, but he said the sector faced a cultural problem in encouraging farmers to cluster together.

Phil Becknell, head of food and farming at the National Farmers’ Union said that large swings in price were having the greatest effect on farmers in the UK.

He said that dairy prices had fallen by a third and cereal prices had also fallen by a third in 18 months.

He said that such swings made planning more difficult and while the good times had seen short-term investment in plant and machinery, there had not been investment in buildings and infrastructure and this is having implications for how farms will be able to produce in the future.

One of the major ways that farmers are now managing volatility is by diversifying their activities into areas such as energy and tourism.

Mr Murray told the inquiry that the main asset that many farmers have is the land and there is room to carry on alternative businesses alongside farming.

He said: “It allows them to stay on the farm and carry on farming.”

He added: “We can’t rely, in a volatile world, on straight income from farming or very generous support from the public.”

Mr Murray said that despite some reluctance from some authorities to back alternative business operations on the farm, farmers “have to keep pressing that we do alternative things on the farm and carry on farming”.

However, in later evidence, George Dunn the Chief Executive of the Tenant Farmers Association said that some tenant farmers found it more difficult to diversify than owner farmers because of difficulty in getting consent from the landlord to branch out into other business areas other than farming.

He also added that tenant farmers have difficulty in a volatile world because they do not have the capital asset of the land as backing to source bank loans and they also feel volatility more because of the way rents are fixed.

Lynsey Martin, the AGRI steering group chairman of the National Federation of Young Farmers’ Clubs also told the committee that young farmers needed better access to finance as they do not have the land to borrow against

She also called for more support for collaborative ideas and share farming in a bid to meet the challenges of volatile markets.

Prof Wilson said that the growth in diversity in recent times had been in alternative energy, but now the incentives to get into that have started to be removed.

He said that approximately 18 per cent of farmers in England had some renewable energy projects running on their farms and half the farms in England have some form of diversification.

“It is not specifically taking the opportunities of volatility that have arisen, it is that they are looking to diversify their business incomes,” Prof Wilson said.

He said that alternative income from areas such as renewable energy offer stability in a volatile market.

Mr Becknell told the inquiry that there was a need for an integrated approach in the supply chain to mitigate the effects of volatility including offering long-term contracts, which will help farmers look at long-term income flows.

Prof Wilson said that with vertically integrated supply chains for UK farmers to benefit there also needs to be some brand recognition.

“By their very nature they remove volatility,” he said.

While Prof Wilson said that diversification helps to counteract volatility, Mr Murray called for some form of insurance as had been adopted in other countries to be used to help mitigate the effects of volatile markets.

An earlier hearing of the inquiry heard that the volatile markets faced by UK farmers were a global issue.

Prof Steve McCorriston from the University if Exeter told the inquiry: “One of the features of commodity markets is that you might have the variability over time and then you have the occasional spikes, which we have witnessed over the last few years.

“It is related to volatility, but a different dimension as part of the distribution of prices.

“When these prices spike, it is a particular characteristic of price movements in agricultural markets.

Prof Wyn Morgan from the University of Sheffield added: “There is variability in inputs and farmers have very little control over that - their inputs are fertiliser, seeds and so forth, often driven by oil prices. There is a correlation between oil prices and both output and input prices.”

Prof Morgan said that exchange rates, the rising price of oil, a whole series of external factors, and the supply and demand shocks all influence market volatility.

Prof Tim Lloyd from Bournemouth University said: “One negative consequence of volatility is that it tends to lead to underinvestment. One of the longer-term effects of that is that you are less able to cope with future increases in demand.

“There is a vicious circle: volatility leads to underinvestment and underinvestment leads to less supply and, as a result, you are more prone to volatility in the future as demand is rising.”

He added: “We almost come to the table thinking that volatility is bad and it is not necessarily, as it can send signals to agents within the market to do different things.

“Excessive volatility that leads to catastrophic losses is clearly something to be avoided, but volatility in itself may not be such a bad thing.”

Another hearing of the inquiry is to be held in January and the Lords’ Committee is expected to publish its report later next year.

Top image: Pictured at the House of Lords hearing above are (l-r) Prof Paul Wilson, Ross Murray and Philip Becknell.